Published:

September 29 2017, 10:30 AM

Unsecured credit explained

Financial terminology can be confusing. Press reports do not always help, sometimes conflating different types of credit or even confusing them.

Most people understand that secured credit is credit that is secured against an asset. Usually this is property - typically the borrower's primary residence, provided there is sufficient equity. However, it can also be jewellery, valuable artwork or similar. It acts as the lender's guarantee that it will get its money back (plus interest), even if the borrower defaults. This relative certainty is why interest rates on secured loans may be lower than those for unsecured loans, and repayment terms more advantageous.

Unsecured borrowing is a different prospect entirely. It covers a wide spectrum of financial products, encompassing credit cards, loans and overdrafts.

Some, like overdrafts, come almost as standard as part of many bank accounts. It does pay to be cautious when it comes to overdrafts, though. Although there is a cap on the charges that banks are permitted to apply, the difference between the fees charged for an authorised and an unauthorised overdraft can be significant. If you are concerned that your bank account may be about to slide into the red and you do not have a pre-arranged overdraft, call your bank. Many overdrafts can be arranged immediately via a single phone call.authorised and an unauthorised overdraft can be significant. If you are concerned that your bank account may be about to slide into the red and you do not have a pre-arranged overdraft, call your bank. Many overdrafts can be arranged immediately via a single phone call.

As with overdrafts, credit cards are a potentially expensive way to borrow. If the Labour Party's proposal to cap interest rates becomes law in the future, credit card holders will not have to repay more than double the amount they borrowed. Until such time arrives, unless you can take advantage of one of the interest-free deals, and can move your balance when the interest-free period ends, credit cards will remain costly.

Unsecured loans come in several guises. Although frequently not classified as such, and differing quite fundamentally from commercially available loans, student loans are one form of unsecured borrowing. Eligibility depends not on your credit rating but on your status as a first-time, UK resident undergraduate. Moreover, repayments only start when you reach a minimum income threshold, and they are always based on earnings, not borrowings. It is entirely possible never to have to pay back a student loan.

Open to the wider market, car loans are another form of unsecured lending. They have their own particular intrinsic disadvantages, not least the fact that borrowers are paying interest on a depreciating asset. Interest rates are often high, especially for buyers without a substantial down payment or older vehicle to trade in.

Personal loans are what most people think of when unsecured credit is mentioned. Available to a broader market than secured loans, a traditional-style unsecured loan is sourced from a bank, typically the borrower's own bank. However, borrowers who wish to ensure they obtain the best lending terms would be wise to shop around in the current competitive lending market. Equally, potential borrowers who fear a poor credit history may count against them might be surprised if they investigate the loans market more closely. Currently, interest rates on personal loans are at an almost historic low, making them an attractive proposition for the well-informed borrower.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY DEBT SECURED ON IT.
ALL RATES VARY SUBJECT TO LOAN AMOUNT, LOAN TYPE AND STATUS. REPAYING YOUR DEBT OVER A LONGER PERIOD OF TIME MAY INCREASE THE AMOUNT YOU PAY.

WARNING - LATE REPAYMENT CAN CAUSE YOU SERIOUS MONEY PROBLEMS. FOR HELP GO TO:

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